slides finance

8/16/2019 Slides Finance

1/46

Make Your FinancialStatements Work for You

Christa Casey, CA


2/46

Business owners & managers – Determine needs

– Past decisions

– Predict future

Banks, creditors & suppliers

– Extend credit

– Credit terms

Income tax authorities

Why you need financial

statements


3/46

Financial Statements

Income Statement Balance Sheet

Cash Flow


4/46

Income StatementFor year ended December 31, 2004

Sales – Product A $100,000Sales – Product B 200,000

Total sales 300,000

Cost of goods sold – Product A 20,000Cost of goods sold – Product B 100,000Total cost of goods sold 120,000

Gross profit 180,000

ExpensesWages 66,000Rent 24,000Office supplies 5,000

Vehicle 4,000Interest 3,000Depreciation 7,000

Total expenses 109,000

Income before taxes 71,000Income tax expense 14,200Net income $56,800


5/46

Balance Sheet At December 31, 2004

AssetsCurrent Assets

Cash $ 100 Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000

152,100

Capital AssetsEquipment, at cost 70,000Less: Acc. dep’n 7,000Net book value 63,000

Total Assets $215,100

LiabilitiesCurrent Liabilities

Bank loan $ 42,000 Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200

99,200

Long-Term Debt 56,000Total liabilities 155,200

EquityCapital stock 100

Retained earnings, opening 4,000Net income 56,800Less: Dividends 1,000Retained earnings, ending 59,800

Total equity 59,900Total liabilities & equity $215,100


6/46

Capital Assets

Equipment purchased in yearCost $70,000

Useful life = 10 years

Depreciation expense = Cost / Useful life

$70,000 / 10 = $7,000

Net Book Value = Cost – Accumulateddepreciation

$70,000 – $7,000 = $63,000


7/46




152,100





99,200






8/46

Balance SheetSole Proprietorship

At December 31, 2004

Assets

Current AssetsCash $ 100

Accts receivable 25,000Inventory 125,000Prepaid expenses 2,000

152,100



Liabilities

Current LiabilitiesBank loan $ 42,000

Accounts payable 38,250Sales tax payable 4,750Income tax payable 14,200

99,200


Owner’s Equity

Owner’s equity, opening 4,100Net income 56,800Less: Draws 1,000Owner’s equity, ending 59,800

Total liab. & owner’s equity $215,100


9/46

Balance SheetPartnership

At December 31, 2004



152,100





99,200


Owners’ EquityPartner A’s equity, opening 3,000Share of net income 28,400

Less: Draws 500Partner A’s equity, ending 30,900

Partner B’s equity, opening 1,100Share of net income 28,400Less: Draws 500

Partner B’s equity, ending 29,000

Total owners’ equity 59,900

Total liab. & owners’ equity $215,100


10/46

Statement of Cash FlowsStatement of Cash Flows

Summary of cash inflows and outflowsfor a period of time


11/46


12/46

Statement of Cash FlowsStatement of Cash Flows

Operating ActivitiesNet income $56,800

Depreciation expense 7,000Change in levels of: Accounts receivable (10,000 – 25,000) (15,000)Inventory (75,000 – 125,000) (50,000)Prepaid expenses (2,000 – 2,000) 0

Accounts payable (38,250 – 42,000) (3,750)

Sales taxes payable (4,750 – 5,000) (250)Income taxes payable (14,200 – 500) 13,700

Total operating activities 8,500

Investing Activities - Purchase of capital asset (70,000)

Financing Activities

Bank loan proceeds (42,000 – 35,900) 6,100Long-term debt proceeds, net of repayment 56,000

Total financing activities 62,100

Other – Dividends paid (1,000)

Decrease in cash (8,500 - 70,000 + 62,100 – 1,000) (400)Cash, beginning of year 500Cash, end of year $100


13/46

How Daily Decisions AffectFinancial Statements

Borrowing


14/46

Lease vs. Buy

Disadvantages of leasing – Hefty early termination penalties – Mandatory maintenance requirements

Advantages of leasing – Monthly payments are usually lower – Smaller down payment required

– Greater flexibility – Less obsolescence risk – Possible larger tax deductions

– Off-balance-sheet financing


15/46


Sales – Product A $100,000Sales – Product B 200,000

Total sales 300,000

Cost of goods sold – Product A 20,000Cost of goods sold – Product B 100,000Total cost of goods sold 120,000

Gross profit 180,000

ExpensesWages 66,000Rent 24,000Office supplies 5,000

Vehicle 4,000Interest 3,000Depreciation 7,000

Total expenses 109,000

Income before taxes 71,000Income tax expense 14,200Net income $56,800


16/46




152,100





99,200






17/46

Lease vs. Buy

Debt-to-equity ratio Used by banks & creditors

= total liabilities 155,200

total equity 60,900

= 2.55


18/46


19/46

Financing Short-Term

vs. Long-Term

How long to finance a loan for – When will you be able to pay it back

– What are you financing?


20/46

Financing Long-Term

vs. Short Term

Current ratio (or working capital ratio) – Determines whether you are able to paydebts when they are due

= Current Assets $152,100

Current Liabilities $99,200

= 1.53

Should usually be at least 1


21/46

Borrowing Requirements

Use your financial statements andforecasts to help you plan & makebetter decisions.


22/46

How Daily Decisions AffectFinancial Statements

Managing Cash & Profit


23/46

Statement of Cash Flow

Identifies where your cash came fromand where it went

Helps predict your future cash flows

Provides useful information that is noton income statement


24/46

Statement of Cash Flow

Can answer common questions – Business is profitable, why is there no

cash?

– Why is there so much cash, if there is solittle profit?

Provides information about operating,investing and financing activities


25/46

Liquidity

How quickly you can convert assets tocash

Cash is your most liquid asset

Working capital = current assets –current liabilities

= 152,100 – 99,200

= 52,900


26/46

Where are you making

your money?

Track each product’s revenues &expenses separately

Compare gross margin percentages


27/46

Where are you making

your money?

Product A Product BSales $100,000 $200,000

Cost of sales 20,000 100,000Gross Profit $ 80,000 $100,000

Gross Profit % 80% 50%

(Gross Profit / sales x 100)


28/46

Planning & Forecasting

Long-run success = proper planning &financial controls

Past financial statements help predict

the future – Identifies trends

Certain expenses may be based onsales volume

Helps evaluate past decisions


29/46

Comparative


2004 2003

Sales – Product A $100,000 110,000Sales – Product B 200,000 40,000Total sales 300,000 150,000

Cost of goods sold – Product A 20,000 25,000Cost of goods sold – Product B 100,000 24,000

Total cost of goods sold 120,000 49,000

Gross profit 180,000 101,000Expenses

Wages 66,000 67,000Rent 24,000 24,000

Office supplies 5,000 2,500 Vehicle 4,000 4,000Interest 3,000 1,000Depreciation 7,000 0

Total expenses 109,000 98,500

Income before taxes 71,000 2,500Income tax expense 14,200 5,00Net income $56,800 $2,000


30/46

Common Size

Income StatementFor year ended December 31, 20042004 2003

Sales – Product A $100,000 $110,000Sales – Product B 200,000 40,000Total sales 300,000 150,000

Cost of goods sold – Product A 20,000 25,000Cost of goods sold – Product B 100,000 24,000

Total cost of goods sold 120,000 (40%) 49,000 (33%)

Gross profit 180,000 101,000Expenses

Wages 66,000 (22%) 67,000 (45%)Rent 24,000 (8%) 24,000 (16%)

Office supplies 5,000 (2%) 2,500 (2%) Vehicle 4,000 (1%) 4,000 (3%)Interest 3,000 (1%) 1,000 (1%)Depreciation 7,000 (2%) 0 (0%)

Total expenses 109,000 98,500

Income before taxes 71,000 2,500Income tax expense 14,200 (5%) 5,00 (0.3%)Net income $56,800 $2,000


31/46

Planning & Forecasting

Long-run success = proper planning &financial controls

Past financial statements help predict

the future – Identifies trends

Certain expenses may be based onsales volume

Helps evaluate past decisions


32/46

Quick FinancialStatement Reviews


33/46

Cash Flow Problems

& Remedies

Accounts Receivable (A/R) The quicker you collect accounts

receivable, the more cash you have

The longer receivables remain uncollected,the least likely they are to be repaid

Use aged receivables list to stay in control


34/46


35/46

Cash Flow Problems

& Remedies

Accounts receivable turnover= total credit sales

(beginning a/r + ending a/r)/2= 300,000

(10,000 + 25,000)/2= 17.14 times a year or every 21.3

days


36/46

Cash Flow Problems

& Remedies

Accounts Payable & Debt Amounts owing to suppliers & banks can

often be reduced by controlling inventory

levels The longer you hold inventory before you

sell it, the less cash you have

Inventory turnover measures how fast yousell your inventory


37/46

Cash Flow Problems

& Remedies

Inventory Turnover= cost of goods sold

(beginning + ending inventory) / 2= $120,000

(75,000 + 125,000) / 2= 1.2 times a year or every 304 days


38/46

Cash Flow Problems

& Remedies

Accounts Payable & Debt Amounts owing to suppliers & banks can

often be reduced by controlling inventory

levels The longer you hold inventory before you

sell it, the less cash you have

Inventory turnover measures how fast yousell your inventory


39/46

Ongoing Cash Flow

Monitor current assets against currentliabilities

Be sure to include the following incurrent liabilities:

– Portion of long-term debt due within

next year – Estimated income taxes payable or

instalments


40/46

Ongoing Cash Flow

Be sure to reduce current assets bythe following:

– Accounts receivable not likely to be

collected from customers

– Obsolete or damaged inventory not likely

to be sold Ensure you have enough liquid assets

to pay off liabilities

Prepare monthly cash flow statement


41/46

Monthly Cash Flow

StatementJanuary February March

Cash in bank (shortfall) 100 (11,675) 2,550

RevenueSales - Product A 8,500 7,500 7,500Sales - Product B 20,000 25,000 18,000

28,500 32,500 25,500DisbursementsInventory purchases 30,000 8,000 10,000Wages 5,500 5,500 5,500Wage benefits 550 550 550Rent 2,000 2,000 2,000

Office supplies 400 400 400Income tax installments 1,200 1,200 1,200Loan payment 575 575 575Interest & bank charges 50 50 50

40,275 18,275 20,275

Monthly surplus (deficit) (11,775) 14,225 5,225Cash balance, end of month (11,675) 2,550 7,775


42/46

Asset Replacement

Buying property & equipment is a largecash outflow

Monitor condition of these assets todetermine when they will need to be

replaced Can use net book value (cost –

accumulated depreciation) to help

determine timing of replacement Planning = time to shop around and secure

appropriate financing


43/46

Future Obligations

What have you committed yourbusiness to? – Long-term bank loans

– Purchasing commitments with suppliers – Rent increases in lease

– Plan on buying out lease at end of term

Budget appropriately to meet theseobligations


44/46

Summary

Financial statements – Income statement

– Balance sheet

– Cash flows Financial statement ratios

– Debt-to-equity

– Current (working capital) – Accounts receivable & inventory turnover

– Gross profit percentage


45/46

Summary

Improving cash flow & ratios Future commitments

Christa Casey, CA


46/46

The Entrepreneurship Centre

110 Laurier Ave. West

Ottawa, Ontario K1P 1J1

Tel.: (613) 560-6081

Fax.: (613) 560-2102

Email: [email protected]

Helping Businesses Succeed

slides finance

Documents